Tandem Energy Holdings (fka TDYH)

[Jagman]

The cost of oil and Hubbert's Peak
(posted on RB AMEP)

"Meanwhile - unfortunately - demand will continue to rise. China and India are rapidly increasing their demand, Europe still has high demands, and of course the United States' thirst for oil - despite all the talk – continued to rise unabated. That means rapidly rising prices."

Tuesday, August 16, 2005

By WILLIAM TUCKER

WORLD OIL PRICES pushed up to $67 a barrel last week. Is it just a seasonal phenomenon, a reflection of summer driving patterns, a sign of Saudi intransigence, a conspiracy by the oil companies? Perhaps. But far more likely, it has something to do with Hubbert's Peak.


In 1956, Shell Oil geologist M. King Hubbert made a startling prediction. Judging from the rate new oil was being discovered, he calculated that American oil production would reach its peak in 1969.

The prediction received little attention. After all, people had been predicting that oil would eventually run out since Colonel Drake drilled the first well at Titusville in 1859. These pessimistic forecasts had always proved wrong.

But Hubbert had some logic on his side. A veteran prospector, King had noticed that - largely because of requirements by the Securities Exchange Commission - oil companies did not immediately add new discoveries to their official "reserves" as soon as they were found but parceled them out year by year. This created the illusion that new oil was continuously being found.

In fact, said Hubbert, when oil reserves were assigned to the year in which they discovered, a startling fact emerged. American oil discoveries had peaked in 1935 and declined steadily since then. Probably well over half the oil that was ever going to be discovered had already been found. Calculating that production usually followed discovery in a 40-year cycle, Hubbert predicted American oil production would peak in 1969.

He was off by one year. We briefly pumped 10 million barrels of oil a day in 1970. Then production went into a gradual but inexorable decline. (We now pump about 8.5 million.) All the fantastic new technologies - the 3-D computer imaging, the horizontal drilling, the pressurized recovery methods - have not lifted us back to where we were in 1970.

The consequences were immediate and extraordinary. In 1970 we were importing 15 percent of our oil. The production peak went unnoticed, demand continued to rise, and within three years we were importing 30 percent of our oil. This left us sitting ducks for the 1974 Arab Oil Boycott.

There is now a theory that world oil production is approaching the same "Hubbert's Peak." Kenneth Deffeyes of Princeton, author of "Hubbert's Peak: The Impending World Oil Shortage," is one of the principle proponents. Applying Hubbert's techniques to world oil, Deffeyes found that non-OPEC discoveries peaked in 1975. That means we should be approaching peak production right about now.

As for OPEC production - who knows? The Saudis are still highly secretive about both their reserves and their production capacity - as are all OPEC nations. OPEC parcels out its production quotas on the basis of reserves - which prompts all OPEC members to exaggerate their capacity.

In addition, the countries are constantly cheating each other through overproducing and don't like to make the numbers public. The most reliable figures - if they can be considered reliable - come from Petrologistics, a small Geneva firm that claims to have spies in every OPEC nation's ports.

What all this suggests is that $67-a-barrel oil is more than a passing phenomenon. What may be happening is something one school of geologists has long predicted - world oil production is topping out.

"We're not going to feel anything when we pass over the peak," says Matthew Simmons, a Texas oil investor whose recent book, "Twilight in the Desert," predicts that Saudi oil may also be approaching its pinnacle.

"The only way we're going to recognize it is in the rear-view mirror."

Passing over Hubbert's Peak doesn't mean we're "running out of oil." It means we're running out of cheap oil. Saudi wells, Caspian wells, Nigerian wells, Texas wells - all will continue to pump oil. But like Alice and the Queen of Hearts, we'll have to run as fast as we can just to stay where we are.

Meanwhile - unfortunately - demand will continue to rise. China and India are rapidly increasing their demand, Europe still has high demands, and of course the United States' thirst for oil - despite all the talk – continued to rise unabated. That means rapidly rising prices.

Will paying $50 to fill up the tank make Americans start thinking more sensibly about alternative means of power? Will gas-electric hybrids start to look more attractive? And if people start refueling their cars on the power grid, where will we get the electricity to accommodate them?

We'd better not start blaming this all on President Bush or wailing about the perfidies of the oil companies. The time has come to start rethinking our energy future.

William Tucker is an associate at the American Enterprise Institute. His column appears Tuesdays. Send comments about this column to [e-mail].

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